Inflation drop puts ISA rates in reach of real returns

With February’s drop in the inflation rate to 3.4 per cent, the highest-paying instant access cash ISA savings products are now offering real returns to savers, experts say.

The cost of living has dropped to its lowest rate since November of 2010, thanks to the Consumer Price Index dropping to 3.4 per cent from its January figure of 3.6 per cent.  This means that the interest rates on more of the UK’s savings products are actually above this 3.4 per cent figure, especially as banks and building societies flog their ISA offerings in the run-up to the tax deadline.

The inflation rate drop was triggered by lower utility bills and prolonged discounts from retailers, industry experts say, though fresh produce and alcohol prices forestalled a larger drop.  Legal & General’s savings director, Mark Gregory, remarked that there were more than 3 million British households that will now have more money available to devote to saving for the future.

Fewer families in the UK will have to earmark funds for household bills than before, Mr Gregory said.  The savings director added that savvy Brits will doubtlessly choose to take this extra cash and use it to build a safer financial future.

Long term ISAs and instant access ISAs with the highest rates of return are almost all within the realm of real returns now, with the former paying as much as 4.5 per cent tax-free.  Instant access savers, with interest rates of around 3.5 per cent, are technically profitable but may require inflation to drop slightly more to offer larger margins to savers, experts say.

However, there is a dark cloud to this silver lining in the form of bad news for savers with an inflation-linked long term savings product that lacked a guaranteed minimum return.  These savers could see themselves in the unenviable position of being locked in to a long-term product with a rate of return that under-performs significantly.

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